Partnerships
Sharing profit between partners: salaries, interest on capital, the appropriation account and current accounts.
ACCA exams this helps with: FA Financial Accounting See the ACCA map
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What it is: A partnership is a business owned by two or more people (partners).
What is different: The income statement is prepared in the same way as for a sole trader. After that, an appropriation account shows how the profit is shared between the partners.
What you do: Share the profit in the order set out in the partnership agreement. First, pay any salaries to partners. Second, pay interest on each partner’s capital. Third, split what is left in the agreed profit-sharing ratio.
Example. Two partners make £40,000 profit. Partner A gets a salary of £10,000. That leaves £30,000. They split it equally, so each gets £15,000. A’s total share = £10,000 + £15,000 = £25,000. B’s total share = £15,000.
Key words
- Partnership agreement
- The written agreement between partners that sets out how profits are shared, including salaries, interest on capital and the profit-sharing ratio.Example: The agreement says profits are shared 3:2 after a £12,000 salary to one partner.
- Profit-sharing ratio
- The proportions in which partners split the profit left after salaries and interest.Example: A ratio of 3:2 means one partner gets 3/5 and the other gets 2/5.
- Appropriation account
- A statement showing how a partnership’s profit is split between the partners: salaries first, then interest on capital, then the rest in the agreed ratio.Example: Profit £80,000. Salary to one partner £12,000, interest £5,000, and the remaining £63,000 split 3:2.
- Current account
- In a partnership, each partner’s account for their salary, interest, share of profit, and the money they take out (drawings).Example: A partner is credited with a £40,800 profit share and debited with £30,000 of drawings.
- Interest on capital
- In a partnership, an amount given to each partner based on the capital they invested. It is a way of sharing profit, not an expense.Example: 5% interest on £60,000 of capital gives the partner £3,000.
Learn
A partnership is a business owned by two or more people (partners). You work out the profit in the same way as for a sole trader. The extra step is sharing the profit between the partners. The partnership agreement says how.
What the agreement usually says
- Profit-sharing ratio: how the profit is split, for example 3:2.
- Partners’ salaries: a fixed amount given to a partner, usually one who does more of the work.
- Interest on capital: an amount given to each partner based on the money they put into the business.
- Interest on drawings: an amount charged to a partner for taking money out. It stops partners taking money out too early.
The appropriation account
This statement shows how the profit is shared. Salaries and interest to partners are not business expenses. They are part of sharing out the profit.
Split what is left using the profit-sharing ratio.
Example: Profit £50,000. Salary to A £10,000. Interest on capital £4,000 in total. Profit left to share = £50,000 − £10,000 − £4,000 = £36,000. With a 2:1 ratio, A gets £24,000 and B gets £12,000.
Capital accounts and current accounts
Each partner usually has two accounts. The capital account holds the money they put in, and it rarely changes. The current account records everything else:
| Debit side (reduces what the firm owes the partner) | Credit side (increases it) |
|---|---|
| Drawings | Salary |
| Interest on drawings | Interest on capital |
| Share of a loss | Share of profit |
Changes such as a new partner joining use these same accounts.
Watch it explained
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Videos from YouTube tutors
These videos are made by independent tutors on YouTube, not by Trial Balance. They may use slightly different terms, for example “owner’s equity” instead of “capital”.
Worked example
Ash and Blake share profits 3:2. Profit for the year is £80,000. Blake gets a salary of £12,000. Interest on capital is 5%: Ash has £60,000 of capital and Blake £40,000.
| Appropriation account | Ash £ | Blake £ | Total £ |
|---|---|---|---|
| Profit for the year | 80,000 | ||
| Salary | – | 12,000 | (12,000) |
| Interest on capital at 5% | 3,000 | 2,000 | (5,000) |
| Residual profit shared 3:2 | 37,800 | 25,200 | (63,000) |
| Total to each partner | 40,800 | 39,200 | 0 |
Ash’s current account started at £2,000 credit, and Ash drew £30,000 in the year. Closing balance = £2,000 + £40,800 − £30,000 = £12,800 credit.
Practice questions
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